October 2022 CEO Minute by Matt Plooster, CEO—CEOs have always relied on the strength of their financial teams. And in these times of market tightening due to a confluence of disruptions, the ability to fund and forecast your company is critically dependent upon not only having a solid grasp of financials, but the finance function as a whole. CEOs should view their internal accounting and finance departments as value creators versus just an overhead cost center.
The quality of your financial reporting directly impacts your capacity to pay back debt or provide a return to investors. Private equity firms, private debt funds and family offices – the people who we interact with on behalf of our clients – base their investments on the operational expertise of financial leadership and verifiable reports of real growth and real profitability.
The primary reason we see deals fall apart is due to poor financial controls and unreliable reporting methods. Another common reason is the financial team lacks a true understanding of how the business works in terms of debt and leverage. Even if a deal does manage to go through in these situations, the cost to your company could be in the tens of millions.
For example, the average business sells for approximately 10x EBITDA. Let’s say the CFO miscalculates payroll by $200K. The impact on enterprise value (the selling price) will be 10x that amount, and ownership will lose $2M on the deal. This is a conservative example reflecting a small miscalculation – the stakes are often much higher.
So what should you look for when hiring a CFO? If your company is valued at $25M or more, it’s important to choose someone with public company experience, preferably in your sector of industry. Public companies are held to a higher standard of internal controls and are experienced in MDNA (management discussion and analysis).
A CFO with public company expertise also increases the likelihood that he or she knows how to interact with institutional partners, capital providers and/or an investment bank. This experience enables the CFO to bring more options to the table for your board and ownership to consider – and it helps to expedite any deals you may want to pursue. Conversely, having an inadequate CFO can delay a transaction indefinitely.
Remember that successful CFOs and accounting teams do not work in Excel or QuickBooks. They take a more comprehensive approach and have a role in overall business operations. This integration allows them to see the full financial picture, explain the strategy behind decisions, forecast what’s ahead and understand what levers your management team can pull to meet company goals.
A typical transaction can take six to nine months to complete, during which potential buyers will evaluate a company’s ability to accurately forecast, meet projections and manage through obstacles. This is especially true in a highly dynamic market and business environment. Regardless of a transaction, we advise companies to spend the resources to install KPI tracking systems to feed a detailed financial projection that utilizes a bottom up or top down approach.
In this era of “high data,” it all comes down to your financial team’s grasp of information. All financial recordings must be supported by trackable, historical and statistical evidence. This means investing in the right software for your sector, be it ERP (enterprise resource planning) or CRM (customer relationship management). Your team needs access to the most credible data and functionalities for executing strategy and developing accurate financial records. And it’s what potential investors demand.
Here’s the reality of what the right system can mean for your company. A client we are currently working with invested in a sophisticated ERP system. At the time it was a financial stretch that required him to take out a $17,000 loan, but as we get ready to sell his company, we estimate that this ERP system accounted for $25M of the $40M value he realized. His foresight and investment more than paid off.
Being in a strong financial position doesn’t begin and end with an impressive CFO or the right system. It involves having a broader team in place that provides your company with outside checks and balances. This means building trusted relationships with your banker, an attorney who is experienced in transactions, and an investment banker who understands your capital structure and has a full suite of services to handle any situation that empowers you to meet your goals.
Bottom line, it’s not just “you get what you pay for.” It could be you get back 10x what you pay for – and I’d say that’s a pretty good investment.